(b) Qualified marital interest requirements--
(1) Property passing to QDOT. If property passes from a decedent to a QDOT, the trust must
qualify for the federal estate tax marital deduction under section
2056(b)(5) (life estate with power of appointment), section 2056(b)(7)
(qualified terminable interest property, including joint and survivor
annuities under section 2056(b)(7)(C)), or section 2056(b)(8) (surviving
spouse is the only noncharitable beneficiary of a charitable remainder
trust), or meet the requirements of an estate trust as defined in
Sec. 20.2056(c)-2(b)(1)(i) through (iii).
(2) Property passing outright to spouse. If property does not pass
from a decedent to a QDOT, but passes to a noncitizen surviving spouse
in a form that meets the requirements for a marital deduction without regard to section
2056(d)(1)(A), and that is not described in paragraph (b)(1) of this
section, the surviving spouse must either actually transfer the
property, or irrevocably assign the property, to a trust (whether
created by the decedent, the decedent's executor or by the surviving
spouse) that meets the requirements of paragraph (c) of this section and
the requirements of Sec. 20.2056A-2T(d) (pertaining, respectively, to
statutory requirements and regulatory requirements imposed to ensure
collection of tax) prior to the filing of the estate tax return for the
decedent's estate and on or before the last date prescribed by law that
the QDOT election may be made (see Sec. 20.2056A-3(a)).
(3) Property passing under a nontransferable plan or arrangement. If
property does not pass from a decedent to a QDOT, but passes under a
plan or other arrangement that meets the requirements for a marital
deduction without regard to section 2056(d)(1)(A) and whose payments are
not assignable or transferable (see Sec. 20.2056A-4(c)), the property is
treated as meeting the requirements of this section, and the
requirements of Sec. 20.2056A-2T(d), if the requirements of
Sec. 20.2056A-4(c) are satisfied. In addition, where an annuity or
similar arrangement is described above except that it is assignable or
transferable, see Sec. 20.2056A-4(b)(7).
(c) Statutory requirements. The requirements of section
2056A(a)(1)(A) and (B) must be satisfied. For purposes of that section,
a domestic corporation is a corporation that is created or organized
under the laws of the United States or under the laws of any state of
the United States or the District of Columbia. The trustee required
under that section is referred to herein as the "U.S. Trustee".
(d) Additional requirements to ensure collection of the section
2056A estate tax--
(1) Security and other arrangements for payment of
estate tax imposed under section 2056A(b)(1)--
(i) QDOTs with assets in
excess of $2 million. If the fair market value of the assets passing,
treated, or deemed to have passed to the QDOT (or in the form of a
QDOT), determined without reduction for any indebtedness with respect to
the assets, as finally determined for federal estate tax purposes,
exceeds $2 million as of the date of the decedent's death or, if
applicable, the alternate valuation date (adjusted as provided in
paragraph (d)(1)(iii) of this section), the trust instrument must meet
the requirements of either paragraph (d)(1)(i) (A), (B), or (C) of this
section at all times during the term of the QDOT. The QDOT may alternate
between any of the arrangements provided in paragraphs (d)(1)(i) (A),
(B), and (C) of this section provided that, at any given time, one of
the arrangements must be operative. See paragraph (d)(1)(iii) of this
section for the definition of finally determined. The QDOT may provide
that the trustee has the discretion to use any one of the security
arrangements or may provide that the trustee is limited to using only
one or two of the arrangements specified in the trust instrument. A
trust instrument that specifically states that the trust must be
administered in compliance with paragraph (d)(1)(i) (A), (B), or (C) of
this section is treated as meeting the requirements of paragraphs
(d)(1)(i) (A), (B), or (C) of this section for purposes of paragraphs
(d)(1)(i) and, if applicable, (d)(1)(ii) of this section.
(A) Bank Trustee. Except as otherwise provided in paragraph (d)(6)
(ii) or (iii) of this section, the trust instrument must provide that
whenever the Bank Trustee security alternative is used for the QDOT, at
least one U.S. Trustee must be a bank as defined in section 581.
Alternatively, except as otherwise provided in paragraph (d)(6) (ii) or
(iii) of this section, at least one trustee must be a United States
branch of a foreign bank, provided that, in such cases, during the
entire term of the QDOT a U.S. Trustee must act as a trustee with the
foreign bank trustee.
(B) Bond. Except as otherwise provided in paragraph (d)(6) (ii) or
(iii) of this section, the trust instrument must provide that whenever
the bond security arrangement alternative is used for the QDOT, the U.S.
Trustee must furnish a bond in favor of the Internal Revenue Service in
an amount equal to 65 percent of the fair market value of the trust
assets (determined without regard to any indebtedness with respect to
the assets) as of the date of
the decedent's death (or alternate valuation date, if applicable), as
finally determined for federal estate tax purposes (and as further
adjusted as provided in paragraph (d)(1)(iv) of this section). If, after
examination of the estate tax return, the fair market value of the trust
assets, as originally reported on the estate tax return, is adjusted
(pursuant to a judicial proceeding or otherwise) resulting in a final
determination of the value of the assets as reported on the return, the
U.S. Trustee has a reasonable period of time (not exceeding sixty days
after the conclusion of the proceeding or other action resulting in a
final determination of the value of the assets) to adjust the amount of
the bond accordingly. But see, paragraph (d)(1)(i)(D) of this section
for a special rule in the case of a substantial undervaluation of QDOT
assets. Unless an alternate arrangement under paragraph (d)(1)(i) (A),
(B), or (C) of this section, or an arrangement prescribed under
paragraph (d)(4) of this section, is provided, or the trust is otherwise
no longer subject to the requirements of section 2056A pursuant to
section 2056A(b)(12), the bond must remain in effect until the trust
ceases to function as a QDOT and any tax liability finally determined to
be due under section 2056A(b) is paid, or is finally determined to be
zero.
(1) Requirements for the bond. The bond must be with a satisfactory
surety, as prescribed under section 7101 and Sec. 301.7101-1 of this
chapter (Regulations on Procedure and Administration), and is subject to
Internal Revenue Service review as may be prescribed by the
Commissioner. The bond may not be cancelled. The bond must be for a term
of at least one year and must be automatically renewable at the end of
that term, on an annual basis thereafter, unless notice of failure to
renew is mailed to the U.S. Trustee and the Internal Revenue Service at
least 60 days prior to the end of the term, including periods of
automatic extensions. Any notice of failure to renew required to be sent
to the Internal Revenue Service must be sent to the Estate and Gift Tax
Group in the District Office of the Internal Revenue Service that has
examination jurisdiction over the decedent's estate (Internal Revenue
Service, District Director, [specify location] District Office, Estate
and Gift Tax Examination Group, [specify Street Address, City, State,
Zip Code]) (or in the case of noncitizen decedents and United States
citizens who die domiciled outside the United States, Estate Tax Group,
Assistant Commissioner (International), 950 L'Enfant Plaza,
CP:IN:D:C:EX:HQ:1114, Washington, DC 20024). The Internal Revenue
Service will not draw on the bond if, within 30 days of receipt of the
notice of failure to renew, the U.S. Trustee notifies the Internal
Revenue Service (at the same address to which notice of failure to renew
is to be sent) that an alternate arrangement under paragraph (d)(1)(i)
(A), (B), or (C) or (d)(4) of this section, has been secured and that
the arrangement will take effect immediately prior to or upon expiration
of the bond.
(2) Form of bond. The bond must be in the following form (or in a
form that is the same as the following form in all material respects),
or in such alternative form as the Commissioner may prescribe by
guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter):
Bond in Favor of the Internal Revenue Service To Secure Payment of
Section 2056A Estate Tax Imposed Under Section 2056A(b) of the Internal
Revenue Code.
KNOW ALL PERSONS BY THESE PRESENTS, That the undersigned, ________,
the SURETY, and ________, the PRINCIPAL, are irrevocably held and firmly
bound to pay the Internal Revenue Service upon written demand that
amount of any tax up to $[amount determined under paragraph (d)(1)(i)(B)
of this section], imposed under section 2056A(b)(1) of the Internal
Revenue Code (including penalties and interest on said tax) determined
by the Internal Revenue Service to be payable with respect to the
principal as trustee for: [Identify trust and governing instrument, name
and address of trustee], a qualified domestic trust as defined in
section 2056A(a) of the Internal Revenue Code, for the payment of which
the said Principal and said Surety, bind themselves, their heirs,
executors, administrators, successors and assigns, jointly and
severally, firmly by these presents.
WHEREAS, The Internal Revenue Service may demand payment under this
bond at any time if the Internal Revenue Service in its sole discretion
determines that a taxable event with respect to the trust has occurred;
the trust no longer qualifies as a qualified domestic trust as described
in section 2056A(a) of the Internal Revenue Code and the regulations promulgated
thereunder, or a distribution subject to the tax imposed under section
2056A(b)(1) has been made. Demand by the Internal Revenue Service for
payment may be made whether or not the tax and tax return (Form 706-QDT)
with respect to the taxable event is due at the time of such demand, or
an assessment has been made by the Internal Revenue Service with respect
to the tax.
NOW THEREFORE, The condition of this obligation is such that it must
not be cancelled and, if payment of all tax liability finally determined
to be imposed under section 2056A(b) is made, then this obligation is
null and void; otherwise, this obligation is to remain in full force and
effect for one year from its effective date and is to be automatically
renewable on an annual basis unless, at least 60 days prior to the
expiration date, including periods of automatic renewals, the surety
mails to the U.S. Trustee and the Internal Revenue Service by Registered
or Certified Mail, return receipt requested, notice of the failure to
renew. Receipt of this notice of failure to renew by the Internal
Revenue Service may be considered a taxable event. The Internal Revenue
Service will not draw upon the bond if, within 30 days of receipt of the
notice of failure to renew, the trustee notifies the Internal Revenue
Service that an alternate security arrangement has been secured and that
the arrangement will take effect immediately prior to or upon expiration
of the bond. The surety remains liable for all taxable events occurring
prior to the date of expiration. All notices required to be sent to the
Internal Revenue Service under this instrument should be sent to
District Director, [specify location] District Office, Estate and Gift
Tax Examination Group, Street Address, City, State, Zip Code. (In the
case of nonresident noncitizen decedents and United States citizens who
die domiciled outside the United States, all notices should be sent to
Estate Tax Group, Assistant Commissioner (International), 950 L'Enfant
Plaza, CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).
This bond shall be effective as of ______.
Principal ______ Date ______
Surety ______ Date ______
(3) Additional governing instrument requirements. The trust
instrument must provide that in the event the Internal Revenue Service
draws on the bond, in accordance with its terms, neither the U.S.
Trustee nor any other person will seek a return of any part of the
remittance until after April 15th of the calendar year following the
year in which the bond is drawn upon. After that date, any such
remittance will be treated as a deposit and returned (without interest)
upon request of the U.S. Trustee, unless it is determined that
assessment or collection of the tax imposed by section 2056A(b)(1) is in
jeopardy, within the meaning of section 6861. If an assessment under
section 6861 is made, the remittance will first be credited to any tax
liability reported on the Form 706-QDT, then to any unpaid balance of a
section 2056A(b)(1)(A) tax liability (plus interest and penalties) for
any prior taxable years, and any balance will then be returned to the
U.S. Trustee.
(4) Procedure. The bond is to be filed with the decedent's federal
estate tax return, Form 706 or 706NA (unless an extension for filing the
bond is granted under Sec. 301.9100 of this chapter). The U.S. Trustee
must provide a written statement with the bond that provides a list of
the assets that will be used to fund the QDOT and the respective values
of the assets. The written statement must also indicate whether any
exclusions under paragraph (d)(1)(iv) of this section are claimed.
(C) Letter of credit. Except as otherwise provided in paragraph
(d)(6) (ii) or (iii) of this section, the trust instrument must provide
that whenever the letter of credit security arrangement is used for the
QDOT, the U.S. Trustee must furnish an irrevocable letter of credit
issued by a bank as defined in section 581, a United States branch of a
foreign bank, or a foreign bank with a confirmation by a bank as defined
in section 581. The letter of credit must be for an amount equal to 65
percent of the fair market value of the trust assets (determined without
regard to any indebtedness with respect to the assets) as of the date of
the decedent's death (or alternate valuation date, if applicable), as
finally determined for federal estate tax purposes (and as further
adjusted as provided in paragraph (d)(1)(iv) of this section). If, after
examination of the estate tax return, the fair market value of the trust
assets, as originally reported on the estate tax return, is adjusted
(pursuant to a judicial proceeding or otherwise) resulting in a final
determination of the value of the assets as reported on the return, the
U.S. Trustee has a reasonable period of time (not exceeding 60 days
after the conclusion of the proceeding
or other action resulting in a final determination of the value of the
assets) to adjust the amount of the letter of credit accordingly. But
see, paragraph (d)(1)(i)(D) of this section for a special rule in the
case of a substantial undervaluation of QDOT assets. Unless an alternate
arrangement under paragraph (d)(1)(i) (A), (B), or (C) of this section,
or an arrangement prescribed under paragraph (d)(4) of this section, is
provided, or the trust is otherwise no longer subject to the
requirements of section 2056A pursuant to section 2056A(b)(12), the
letter of credit must remain in effect until the trust ceases to
function as a QDOT and any tax liability finally determined to be due
under section 2056A(b) is paid or is finally determined to be zero.
(1) Requirements for the letter of credit. The letter of credit must
be irrevocable and provide for sight payment. The letter of credit must
have a term of at least one year and must be automatically renewable at
the end of the term, at least on an annual basis, unless notice of
failure to renew is mailed to the U.S. Trustee and the Internal Revenue
Service at least sixty days prior to the end of the term, including
periods of automatic renewals. If the letter of credit is issued by the
U.S. branch of a foreign bank and the U.S. branch is closing, the branch
(or foreign bank) must notify the U.S. Trustee and the Internal Revenue
Service of the closure and the notice of closure must be mailed at least
60 days prior to the date of closure. Any notice of failure to renew or
closure of a U.S. branch of a foreign bank required to be sent to the
Internal Revenue Service must be sent to the Estate and Gift Tax Group
in the District Office of the Internal Revenue Service that has
examination jurisdiction over the decedent's estate (Internal Revenue
Service, District Director, [specify location] District Office, Estate
and Gift Tax Examination Group, [Street Address, City State, Zip Code])
(or in the case of noncitizen decedents and United States citizens who
die domiciled outside the United States, Estate Tax, Assistant
Commissioner (International), 950 L'Enfant Plaza, CP:IN:D:C:EX:HQ:1114,
Washington, DC 20024). The Internal Revenue Service will not draw on the
letter of credit if, within 30 days of receipt of the notice of failure
to renew or closure of the U.S. branch of a foreign bank, the U.S.
Trustee notifies the Internal Revenue Service (at the same address to
which notice is to be sent) that an alternate arrangement under
paragraph (d)(1)(i) (A), (B), or (C), or (d)(4) of this section, has
been secured and that the arrangement will take effect immediately prior
to or upon expiration of the letter of credit or closure of the U.S.
branch of the foreign bank.
(2) Form of letter of credit. The letter of credit must be made in
the following form (or in a form that is the same as the following form
in all material respects), or an alternative form that the Commissioner
prescribes by guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District Office
Estate and Gift Tax Examination Group
[Street Address, City, State, ZIP Code]
[Or in the case of nonresident noncitizen decedents and United States citizens who die domiciled outside the United States,
To: Estate Tax Group,
Assistant Commissioner (International)
950 L'Enfant Plaza
CP:IN:D:C:EX:HQ:1114
Washington, DC 20024].
Dear Sirs:
We hereby establish our irrevocable Letter of Credit No.
____ in your favor for drawings up to U.S. $ [Applicant should provide
bank with amount which Applicant determined under paragraph
(d)(1)(i)(C)] effective immediately. This Letter of Credit is issued,
presentable and payable at our office at ________ and expires at 3:00
p.m. [EDT, EST, CDT, CST, MDT, MST, PDT, PST] on ____ at said office.
For information and reference only, we are informed that this Letter
of Credit relates to [Applicant should provide bank with the identity of
qualified domestic trust and governing instrument], and the name,
address, and identifying number of the trustee is [Applicant should
provide bank with the trustee name, address and the QDOT's TIN number,
if any].
Drawings on this Letter of Credit are available upon presentation of
the following documents:
1. Your draft drawn at sight on us bearing our Letter of Credit No.
____; and
2. Your signed statement as follows:
The amount of the accompanying draft is payable under [identify
bank] irrevocable Letter of Credit No. ______ pursuant to section 2056A
of the Internal Revenue Code and the regulations promulgated thereunder,
because the Internal Revenue Service in its sole discretion has determined that
a "taxable event" with respect to the trust has occurred; e.g., the
trust no longer qualifies as a qualified domestic trust as described in
section 2056A of the Internal Revenue Code and regulations promulgated
thereunder, or a distribution subject to the tax imposed under section
2056A(b)(1) of the Internal Revenue Code has been made.
Except as expressly stated herein, this undertaking is not subject
to any agreement, requirement or qualification. The obligation of [Name
of Issuing Bank] under this Letter of Credit is the individual
obligation of [Name of Issuing Bank] and is in no way contingent upon
reimbursement with respect thereto.
It is a condition of this Letter of Credit that it is deemed to be
automatically extended without amendment for a period of one year from
the expiration date hereof, or any future expiration date, unless at
least 60 days prior to any expiration date, we mail to you and to the
U.S. Trustee notice by Registered Mail or Certified Mail, return receipt
requested, or by courier to your and the trustee's address indicated
above, that we elect not to consider this Letter of Credit renewed for
any such additional period. Upon receipt of this notice, you may draw
hereunder on or before the then current expiration date, by presentation
of your draft and statement as stipulated above.
[In the case of a letter of credit issued by a U.S. branch of a
foreign bank the following language must be added]. It is a further
condition of this Letter of Credit that if the U.S. branch of [name of
foreign bank] is to be closed, that at least sixty days prior to
closing, we mail to you and the U.S. Trustee notice by Registered Mail
or Certified Mail, return receipt requested, or by courier to your and
the U.S. Trustee's address indicated above, that this branch will be
closing. This notice will specify the actual date of closing. Upon
receipt of the notice, you may draw hereunder on or before the date of
closure, by presentation of your draft and statement as stipulated
above.
Except where otherwise stated herein, this Letter of Credit is
subject to the Uniform Customs and Practice for Documentary Credits,
1993 Revision, ICC Publication No. 500. If we notify you of our election
not to consider this Letter of Credit renewed and the expiration date
occurs during an interruption of business described in Article 17 of
said Publication 500, unless you had consented to cancellation prior to
the expiration date, the bank hereby specifically agrees to effect
payment if this Letter of Credit is drawn against within 30 days after
the resumption of business.
Except as stated herein, this Letter of Credit cannot be modified or
revoked without your consent.
Authorized Signature ______ Date ______
(3) Form of confirmation. If the requirements of this paragraph
(d)(1)(i)(C) are satisfied by the issuance of a letter of credit by a
foreign bank with confirmation by a bank as defined in section 581, the
confirmation must be made in the following form (or in a form that is
the same as the following form in all material respects), or an
alternative form as the Commissioner prescribes by guidance published in
the Internal Revenue Bulletin (see Sec. 602.101(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District Office
Estate and Gift Tax Examination Group
[State Address, City, State, ZIP Code]
[or in the case of nonresident noncitizen decedents and United States
citizens who die domiciled outside the United States,
To: Estate Tax Group,
Assistant Commissioner (International)
950 L'Enfant Plaza
CP:IN:D:C:EX:HQ:1114,
Washington, DC 20024].
Dear Sirs:
We hereby confirm the enclosed irrevocable Letter of
Credit No. ______, and amendments thereto, if any, in your favor by
________ [Issuing Bank] for drawings up to U.S. ________ [same amount as
in initial Letter of Credit] effective immediately. This confirmation is
issued, presentable and payable at our office at ________ and expires at
3:00 p.m. [EDT, EST, CDT, CST, MDT, MST, PDT, PST] on ______ at said
office.
For information and reference only, we are informed that this
Confirmation relates to [Applicant should provide bank with the identity
of qualified domestic trust and governing instrument], and the name,
address, and identifying number of the trustee is [Applicant should
provide bank with the trustee name, address and the QDOT's TIN number,
if any].
We hereby undertake to honor your sight draft(s) drawn as specified
in the Letter of Credit.
Except as expressly stated herein, this undertaking is not subject
to any agreement, condition or qualification. The obligation of [Name of
Confirming Bank] under this Confirmation is the individual obligation of
[Name of Confirming Bank] and is in no way contingent upon reimbursement
with respect thereto.
It is a condition of this Confirmation that it is deemed to be
automatically extended without amendment for a period of one year from
the expiry date hereof, or any future expiration date, unless at least
sixty days prior to the expiration date, we send to you and to the U.S.
Trustee notice by Registered Mail or Certified Mail, return receipt requested, or by courier to your
and the trustee's addresses, respectively, indicated above, that we
elect not to consider this Confirmation renewed for any additional
period. Upon receipt of this notice by you, you may draw hereunder on or
before the then current expiration date, by presentation of your draft
and statement as stipulated above.
Except where otherwise stated herein, this Confirmation is subject
to the Uniform Customs and Practice for Documentary Credits, 1993
Revision, ICC Publication No. 500. If we notify you of our election not
to consider this Confirmation renewed and the expiration date occurs
during an interruption of business described in Article 17 of said
Publication 500, unless you had consented to cancellation prior to the
expiration date, the bank hereby specifically agrees to effect payment
if this Confirmation is drawn against within 30 days after the
resumption of business.
Except as stated herein, this Confirmation cannot be modified or
revoked without your consent.
Authorized Signature ________ Date ______
(4) Additional governing instrument requirements. The trust
instrument must provide that if the Internal Revenue Service draws on
the letter of credit (or confirmation) in accordance with its terms,
neither the U.S. Trustee nor any other person will seek a return of any
part of the remittance until April 15th of the calendar year following
the year in which the letter of credit (or confirmation) is drawn upon.
After that date, any such remittance will be treated as a deposit and
returned (without interest) upon request of the U.S. Trustee after the
date specified above, unless it is determined that assessment or
collection of the tax imposed by section 2056A(b)(1) is in jeopardy,
within the meaning of section 6861. If an assessment under section 6861
is made, the remittance will first be credited to any tax liability
reported on the Form 706-QDT, then to any unpaid balance of a section
2056A(b)(1)(A) tax liability (plus interest and penalties) for any prior
taxable years, and any balance will then be returned to the U.S.
Trustee.
(5) Procedure. The letter of credit (and confirmation, if
applicable) is to be filed with the decedent's federal estate tax
return, Form 706 or 706NA (unless an extension for filing the letter of
credit is granted under Sec. 301.9100 of this chapter). The U.S. Trustee
must provide a written statement with the letter of credit that provides
a list of the assets that will be used to fund the QDOT and the
respective values of the assets. The written statement must also
indicate whether any exclusions under paragraph (d)(1)(iv) of this
section are claimed.
(D) Disallowance of marital deduction for substantial undervaluation
of QDOT property in certain situations.
(1) If either--
(i) The bond or letter of credit security arrangement under
paragraph (d)(1)(i) (B) or (C) of this section is chosen by the U.S.
Trustee; or
(ii) The QDOT property as originally reported on the decedent's
estate tax return is valued at $2 million or less but, as finally
determined for federal estate tax purposes, the QDOT property is
determined to be in excess of $2 million, then the marital deduction
will be disallowed in its entirety for failure to comply with the
requirements of section 2056A if the value of the QDOT property reported
on the estate tax return is 50 percent or less of the amount finally
determined to be the correct value of the property for federal estate
tax purposes.
(2) The preceding sentence does not apply if--
(i) There was reasonable cause for the undervaluation; and
(ii) The fiduciary of the estate acted in good faith with respect to
the undervaluation. For this purpose, Sec. 1.6664-4(b) of this chapter
applies, to the extent applicable, with respect to the facts and
circumstances to be taken into account in making this determination.
(ii) QDOTs with assets of $2 million or less. If the fair market
value of the assets passing, treated, or deemed to have passed to the
QDOT (or in the form of a QDOT), determined without reduction for any
indebtedness with respect to the assets, as finally determined for
federal estate tax purposes, is $2 million or less as of the date of the
decedent's death or, if applicable, the alternate valuation date
(adjusted as provided in paragraph (d)(1)(iv) of this section), the
trust instrument must provide that either no more than 35 percent of the
fair market value of the trust assets, determined annually on the last
day of the taxable year of
the trust (or on the last day of the calendar year if the QDOT does not
have a taxable year), will consist of real property located outside of
the United States, or the trust will meet the requirements prescribed by
paragraph (d)(1)(i)(A), (B), or (C) of this section. See paragraph
(d)(1)(ii)(D) of this section for special rules in the case of principal
distributions from a QDOT, fluctuations in the value of foreign real
property held by a QDOT due to changes in value of foreign currency, and
fluctuations in the fair market value of assets held by the QDOT. See
paragraph (d)(1)(iv) of this section for a special rule for personal
residences. If the fair market value, as originally reported on the
decedent's estate tax return, of the assets passing or deemed to have
passed to the QDOT (determined without reduction for any indebtedness
with respect to the assets) is $2 million or less, but the fair market
value of the assets as finally determined for federal estate tax
purposes is more than $2 million, the U.S. Trustee has a reasonable
period of time (not exceeding sixty days after the conclusion of the
proceeding or other action resulting in a final determination of the
value of the assets) to meet the requirements prescribed by paragraph
(d)(1)(i) (A), (B), or (C) of this section. However, see paragraph
(d)(1)(i)(D) of this section in the case of a substantial undervaluation
of QDOT assets. See Sec. 20.2056A-2(d)(1)(iii) for the definition of
finally determined.
(A) Multiple QDOTs. For purposes of this paragraph (d)(1)(ii), if
more than one QDOT is established for the benefit of the surviving
spouse, the fair market value of all the QDOTs are aggregated in
determining whether the $2 million threshold under this paragraph
(d)(1)(ii) is exceeded.
(B) Look-through rule. For purposes of determining whether no more
than 35 percent of the fair market value of the QDOT assets consists of
foreign real property, if the QDOT owns more than 20% of the voting
stock or value in a corporation with 15 or fewer shareholders, or more
than 20% of the capital interest of a partnership with 15 or fewer
partners, then all assets owned by the corporation or partnership are
deemed to be owned directly by the QDOT to the extent of the QDOT's pro
rata share of the assets of that corporation or partnership. For a
partnership, the QDOT partner's pro rata share is based on the greater
of its interest in the capital or profits of the partnership. For
purposes of this paragraph, all stock in the corporation, or interests
in the partnership, as the case may be, owned by or held for the benefit
of the surviving spouse, or any members of the surviving spouse's family
(within the meaning of section 267(c)(4)), are treated as owned by the
QDOT solely for purposes of determining the number of partners or
shareholders in the entity and the QDOT's percentage voting interest or
value in the corporation or capital interest in the partnership, but not
for the purpose of determining the QDOT's pro rata share of the assets
of the entity.
(C) Interests in other entities. Interests owned by the QDOT in
other entities (such as an interest in a trust) are accorded treatment
consistent with that described in paragraph (d)(1)(ii)(B) of this
section.
(D) Special rule for foreign real property. For purposes of this
paragraph (d)(1)(ii), if, on the last day of any taxable year during the
term of the QDOT (or the last day of the calendar year if the QDOT does
not have a taxable year), the value of foreign real property owned by
the QDOT exceeds 35 percent of the fair market value of the trust assets
due to: distributions of QDOT principal during that year; fluctuations
in the value of the foreign currency in the jurisdiction where the real
estate is located; or fluctuations in the fair market value of any
assets held in the QDOT, then the QDOT will not be treated as failing to
meet the requirements of this paragraph (d)(1). Accordingly, the QDOT
will not cease to be a QDOT within the meaning of Sec. 20.2056A-5(b)(3)
if, by the end of the taxable year (or the last day of the calendar year
if the QDOT does not have a taxable year) of the QDOT immediately
following the year in which the 35 percent limit was exceeded, the value
of the foreign real property held by the QDOT does not exceed 35 percent
of the fair market value of the trust assets or, alternatively, the QDOT
meets the requirements of either paragraph(d)(1)(i) (A), (B), or (C) of this section on or before the close of
that succeeding year.
(iii) Definition of finally determined. For purposes of
Sec. 20.2056A-2(d)(1) (i) and (ii), the fair market value of assets will
be treated as finally determined on the earliest to occur of--
(A) The entry of a decision, judgment, decree, or other order by any
court of competent jurisdiction that has become final;
(B) The execution of a closing agreement made under section 7121;
(C) Any final disposition by the Internal Revenue Service of a claim
for refund;
(D) The issuance of an estate tax closing letter (Form L-154 or
equivalent) if no claim for refund is filed; or
(E) The expiration of the period of assessment.
(iv) Special rules for personal residence and related personal
effects--
(A) Two million dollar threshold. For purposes of determining
whether the $2 million threshold under paragraphs (d)(1)(i) and (ii) of
this section has been exceeded, the executor of the estate may elect to
exclude up to $600,000 in value attributable to real property (and
related furnishings) owned directly by the QDOT that is used by, or held
for the use of the surviving spouse as a personal residence and that
passes, or is treated as passing, to the QDOT under section 2056(d). The
election may be made regardless of whether the real property is situated
within or without the United States. The election is made by attaching
to the estate tax return on which the QDOT election is made a written
statement claiming the exclusion. The statement must clearly identify
the property or properties (i.e. address and location) for which the
election is being made.
(B) Security requirement. For purposes of determining the amount of
the bond or letter of credit required when paragraph (d)(1)(i)(B) or (C)
of this section applies, the executor of the estate may elect to
exclude, during the term of the QDOT, up to $600,000 in value
attributable to real property (and related furnishings) owned directly
by the QDOT that is used by, or held for the use of the surviving spouse
as a personal residence and that passes, or is treated as passing, to
the QDOT under section 2056(d). The election may be made regardless of
whether the real property is situated within or without the United
States. The election is made by attaching to the estate tax return on
which the QDOT election is made a written statement claiming the
exclusion. If an election is not made on the decedent's estate tax
return, the election may be made, prospectively, at any time, during the
term of the QDOT, by attaching to the Form 706-QDT a written statement
claiming the exclusion. A statement may also be attached to the Form
706-QDT that cancels a prior election of the personal residence
exclusion that was made under this paragraph, either on the decedent's
estate tax return or on a Form 706-QDT.
(C) Foreign real property limitation. The special rules of this
paragraph (d)(1)(iv) do not apply for purposes of determining whether
more than 35 percent of the QDOT assets consist of foreign real property
under paragraph (d)(1)(ii) of this section.
(D) Personal residence. For purposes of this paragraph (d)(1)(iv), a
personal residence is either the principal residence of the surviving
spouse within the meaning of section 1034 or one other residence of the
surviving spouse. In order to be used by or held for the use of the
spouse as a personal residence, the residence must be available at all
times for use by the surviving spouse. The residence may not be rented
to another party, even when not occupied by the spouse. A personal
residence may include appurtenant structures used by the surviving
spouse for residential purposes and adjacent land not in excess of that
which is reasonably appropriate for residential purposes (taking into
account the residence's size and location).
(E) Related furnishings. The term related furnishings means
furniture and commonly included items such as appliances, fixtures,
decorative items and china, that are not beyond the value associated
with normal household and decorative use. Rare artwork, valuable
antiques, and automobiles of any kind or class are not within the
meaning of this term.
(F) Required statement. If one or both of the exclusions provided in
paragraph (d)(1)(iv)(A) or (B) of this section are elected by the
executor of the estate and the personal residence is later sold or
ceases to be used, or held for use as a personal residence, the U.S.
Trustee must file the statement that is required under paragraph (d)(3)
of this section at the time and in the manner provided in paragraphs
(d)(3)(ii) and (iii) of this section.
(G) Cessation of use. Except as provided in this paragraph
(d)(1)(iv)(G), if the residence ceases to be used by, or held for the
use of, the spouse as a personal residence of the spouse, or if the
residence is sold during the term of the QDOT, the exclusions provided
in paragraphs (d)(1)(iv)(A) and (B) of this section cease to apply.
However, if the residence is sold, the exclusion continues to apply if,
within 12 months of the date of sale, the amount of the adjusted sales
price (as defined in section 1034(b)(1)) is reinvested to purchase a new
personal residence for the spouse. If less than the amount of the
adjusted sales price is reinvested, the amount of the exclusion equals
the amount reinvested in the new residence plus any amount previously
allocated to a residence that continues to qualify for the exclusion, up
to a total of $600,000. If the QDOT ceases to qualify for all or any
portion of the initially claimed exclusions, paragraph (d)(1)(i) of this
section, if applicable (determined as if the portion of the exclusions
disallowed had not been initially claimed by the QDOT), must be complied
with no later than 120 days after the effective date of the cessation.
In addition, if a residence ceases to be used by, or held for the use of
the spouse as a personal residence of the spouse or if the personal
residence is sold during the term of the QDOT, the personal residence
exclusion may be allocated to another residence that is held in either
the same QDOT or in another QDOT that is established for the surviving
spouse, if the other residence qualifies as being used by, or held for
the use of the spouse as a personal residence. The trustee may allocate
up to $600,000 to the new personal residence (less the amount previously
allocated to a residence that continues to qualify for the exclusion)
even if the entire $600,000 exclusion was not previously utilized with
respect to the original personal residence(s).
(v) Anti-abuse rule. Regardless of whether the QDOT designates a
bank as the U.S. Trustee under paragraph (d)(1)(i)(A) of this section
(or otherwise complies with paragraph (d)(1)(i)(A) of this section by
naming a foreign bank with a United States branch as a trustee to serve
with the U.S. Trustee), complies with paragraph (d)(1)(i)(B) or (C) of
this section, or is subject to and complies with the foreign real
property requirements of paragraph (d)(1)(ii) of this section, the trust
immediately ceases to qualify as a QDOT if the trust utilizes any device
or arrangement that has, as a principal purpose, the avoidance of
liability for the estate tax imposed under section 2056A(b)(1), or the
prevention of the collection of the tax. For example, the trust may
become subject to this paragraph (d)(1)(v) if the U.S. Trustee that is
selected is a domestic corporation established with insubstantial
capitalization by the surviving spouse or members of the spouse's
family.
(2) Individual trustees. If the U.S. Trustee is an individual United
States citizen, the individual must have a tax home (as defined in
section 911(d)(3)) in the United States.
(3) Annual reporting requirements--
(i) In general. The U.S. Trustee
must file a written statement described in paragraph (d)(3)(iii) of this
section, if the QDOT satisfies any one of the following criteria for the
applicable reporting years--
(A) The QDOT directly owns any foreign real property on the last day
of its taxable year (or the last day of the calendar year if it has no
taxable year), and the QDOT does not satisfy the requirements of
paragraph (d)(1)(i) (A), (B), or (C) or (d)(4) of this section by
employing a bank as trustee or providing security; or
(B) The personal residence previously subject to the exclusion under
paragraph (d)(1)(iv) of this section is sold, or that personal residence
ceases to be used, or held for use, as a personal residence, during the
taxable year (or during the calendar year if the QDOT does not have a
taxable year); or
(C) After the application of the look-through rule contained in
paragraph (d)(1)(ii)(B) of this section, the QDOT is treated as owning
any foreign real property on the last day of the taxable year (or the
last day of the calendar year if the QDOT has no taxable year), and the
QDOT does not satisfy the requirements of paragraph (d)(1) (A), (B), (C)
or (d)(4) of this section by employing a bank as trustee or providing
security.
(ii) Time and manner of filing. The written statement, containing
the information described in paragraph (d)(3)(iii) of this section, is
to be filed for the taxable year of the QDOT (calendar year if the QDOT
does not have a taxable year) for which any of the events or conditions
requiring the filing of a statement under paragraph (d)(3)(i) of this
section have occurred or have been satisfied. The written statement is
to be submitted to the Internal Revenue Service by filing a Form 706-
QDT, with the statement attached, no later than April 15th of the
calendar year following the calendar year in which or with which the
taxable year of the QDOT ends (or by April 15th of the following year if
the QDOT has no taxable year), unless an extension of time is obtained
under Sec. 20.2056A-11(a). The Form 706-QDT, with attached statement,
must be filed regardless of whether the Form 706-QDT is otherwise
required to be filed under the provisions of this chapter. Failure to
file timely the statement may subject the QDOT to the rules of paragraph
(d)(1)(v) of this section.
(iii) Contents of statement. The written statement must contain the
following information--
(A) The name, address, and taxpayer identification number, if any,
of the U.S. Trustee and the QDOT; and
(B) A list summarizing the assets held by the QDOT, together with
the fair market value of each listed QDOT asset, determined as of the
last day of the taxable year (December 31 if the QDOT does not have a
taxable year) for which the written statement is filed. If the look-
through rule contained in paragraph (d)(1)(ii)(B) of this section
applies, then the partnership, corporation, trust or other entity must
be identified and the QDOT's pro rata share of the foreign real property
and other assets owned by that entity must be listed on the statement as
if directly owned by the QDOT; and
(C) If a personal residence previously subject to the exclusion
under paragraph (d)(1)(iv) of this section is sold during the taxable
year (or during the calendar year if the QDOT does not have a taxable
year), the statement must provide the date of sale, the adjusted sales
price (as defined in section 1034(b)(1)), the extent to which the amount
of the adjusted sales price has been or will be used to purchase a new
personal residence and, if not timely reinvested, the steps that will or
have been taken to comply with paragraph (d)(1)(i) of this section, if
applicable; and
(D) If the personal residence ceases to be used, or held for use, as
a personal residence by the surviving spouse during the taxable year (or
during the calendar year if the QDOT does not have a taxable year), the
written statement must describe the steps that will or have been taken
to comply with paragraph (d)(1)(i) of this section, if applicable.
(4) Request for alternate arrangement or waiver. If the Commissioner
provides guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter) pursuant to which a testator,
executor, or the U.S. Trustee may adopt an alternate plan or arrangement
to assure collection of the section 2056A estate tax, and if the
alternate plan or arrangement is adopted in accordance with the
published guidance, then the QDOT will be treated, subject to paragraph
(d)(1)(v) of this section, as meeting the requirements of paragraph
(d)(1) of this section. Until this guidance is published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter), taxpayers may
submit a request for a private letter ruling for the approval of an
alternate plan or arrangement proposed to be adopted to assure
collection of the section 2056A estate tax in lieu of the requirements
prescribed in this paragraph (d)(4).
(5) Adjustment of dollar threshold and exclusion. The Commissioner
may increase or decrease the dollar amounts referred to in paragraph
(d)(1)(i), (ii) or (iv) of this section in accordance with
guidance published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(6) Effective date and special rules.
(i) This paragraph (d) is effective for estates of decedents dying after February 19, 1996.
(ii) Special rule in the case of incompetency. A revocable trust or
a trust created under the terms of a will is deemed to meet the
governing instrument requirements of this paragraph (d) notwithstanding
that the requirements are not contained in the governing instrument (or
otherwise incorporated by reference) if the trust instrument (or will)
was executed on or before November 20, 1995, and--
(A) The testator or settlor dies after February 19, 1996;
(B) The testator or settlor is, on November 20, 1995, and at all
times thereafter, under a legal disability to amend the will or trust instrument;
(C) The will or trust instrument does not provide the executor or
the U.S. Trustee with a power to amend the instrument in order to meet
the requirements of section 2056A; and
(D) The U.S. Trustee provides a written statement with the federal
estate tax return (Form 706 or 706NA) that the trust is being
administered (or will be administered) so as to be in actual compliance
with the requirements of this paragraph (d) and will continue to be
administered so as to be in actual compliance with this paragraph (d)
for the duration of the trust. This statement must be binding on all
successor trustees.
(iii) Special rule in the case of certain irrevocable trusts. An
irrevocable trust is deemed to meet the governing instrument
requirements of this paragraph (d) notwithstanding that the requirements
are not contained in the governing instrument (or otherwise incorporated
by reference) if the trust was executed on or before November 20, 1995, and:
(A) The settlor dies after February 19, 1996;
(B) The trust instrument does not provide the U.S. Trustee with a
power to amend the trust instrument in order to meet the requirements of
section 2056A; and
(C) The U.S. Trustee provides a written statement with the
decedent's federal estate tax return (Form 706 or 706NA) that the trust
is being administered in actual compliance with the requirements of this
paragraph (d) and will continue to be administered so as to be in actual
compliance with this paragraph (d) for the duration of the trust. This
statement must be binding on all successor trustees.